Most everyone would agree that stopping the foreclosures would be a logical goal to help heal the housing market’s woes. How to accomplish that goal is the bigger challenge.
Depending on your perspective, the root cause of this mess is A) greedy financiers, B) irresponsible borrowers, or C) inept government. My answer is D) all of the above.
A) Steps are being taken to license mortgage brokers, improve disclosure requirements, and remove certain caustic contract clauses that unduly penalize unsuspecting borrowers. Some lenders worked with appraisers that gave artificially high appraisals in order to keep deals together, which began a vicious cycle of price inflation and loans to unqualified buyers, so appraisers are also under increased regulation. Wall Street also brought much of the financial mess upon itself by repackaging loans and other financial instruments into forms that were unrecognizable from the originals. The more repackaging that occurred, the more they built a financial house of cards.
B) Lending standards and public awareness of risky loans have been elevated greatly since the meltdown began. While some people were victims of bad lenders, many more folks were guilty of pushing their financial envelope to the edge, just like Wall Street. Once anything went wrong, their world came crumbling down.
C) Government oversight has been sorely lacking in the financial sector. The world of trading derivatives and other complex financial instruments was allowed to happen without proper controls. Fannie Mae & Freddie Mac should also have been required to live by generally accepted financial standards, but our congressional leaders chose to ignore signs of trouble in favor of “feel good” policies that put unqualified people into homes they could not afford. Now we are looking at massive outlays of money for roads and social agenda items that are passed under the guise of economic recovery.
Loan modifications have been tried, but have been largely ineffective because most reworked loans did not address the problem – the payment is too high for the borrower. The lender just added penalties to the back end of the loan and the borrower still could not afford it. Result – re-failure in six months or less. Once the bank takes over the house, they are not known for being customer friendly. Buying an unwanted asset from a bank is strangely difficult to do.
As a footnote to that, incentives from the federal government to entice first time buyers into the market is also difficult because first time buyers often do not have the stomach or resources to take a foreclosure and bring it up to livable standards.
So what do we do now? 1) Let’s start by making the banks lend the money they have been given from the feds. 2) Next, make the tax credit available to all buyers of foreclosures, bank owned homes and short sales, not just first timers. First timers can usually only afford smaller homes, and all price levels have been affected. 3) Get lenders to allow short sales and then let that person buy a home they can actually afford. That would keep a lot of folks from complete financial disaster and promote more market activity. 4) The first two steps would get lots of investors back into the real estate market, so why not adjust capital gains taxes to their benefit. They are fueling the economy by putting their money in the market – give them a reason to continue that behavior.
As we all have seen, housing can drive the entire economy when it has gas (money). In addition to Realtors making money again, house sales create revenue streams for contractors, appliance retailers, home improvement stores, closing attorneys, insurance companies, title companies, state and local government, and so on. When all those folks are working again, they will in turn go on vacation, buy a new car, etc.
While this is not as glamorous as legislation favored by our legislators, it would seem to make more sense, and our lack of common sense got us to where we are today. Contact your elected officials and tell them how you feel. If you are happy with the way things are, there is no need to bother them.
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